‘Words’ of caution for investors | VailDaily.com

‘Words’ of caution for investors

Richard Loth

I’ve seen a number of financial writers make mention that a cautionary position wouldn’t be a bad strategy for individual investors as they enter the fourth year of a fairly strong bull market. As measured by the Dow Jones Wilshire 5000 Index, stock investors have enjoyed annual gains of 31.6 percent, 12.6 percent and 6.4 percent in 2003, 2004 and 2005, respectively.

If we can believe the consensus forecast of the majority of market experts, 2006 should still be positive for equities with average returns more or less in the range of those last year.

If you’ve been reading this column over the past few weeks, you’re aware of my reservations and concern for so-called geopolitical “event risks” and the decision-making deadlock in Washington, which could turn 2006 into an ugly duckling for investors.

Then again, things might turn out just fine.

Whatever the circumstances of the market, and whatever the outcome, investors should be-aware of certain cautionary signs that ” if ignored ” could adversely affect investors’ investment positions. For this column, I’ve selected a few words that appear regularly in investment literature and the media that merit at least a yellow flag ” if not, in some cases ” a red one.

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Tax-deferred or variable annuity: This type of annuity is a very complicated, expense-laden product that purports to combine insurance and investment benefits into a single vehicle. To add insult to injury, those who sell these products, and ” believe me ” this is a product that takes a real sales job, walk away with commissions in the high-single digits, which you pay for.- –

Personal finance writer, Kathy Kristof, in a recent article in the Los Angeles Times, quoted several financial experts that are of the opinion that “tax-deferred annuities are rarely a suitable investment for anyone.” One of those consulted, Scott Leonard, a certified financial planner, took the words right out of my mouth when he said that “annuities may be good for the rare individual, but he hasn’t found such a person in the last 15 years.”

Class A, B, and C shares: There’s nothing “classy” about these designations that are applied to mutual funds that carry a sales charge or load. It doesn’t matter what letter you choose, you’re still paying some combination of sales charges, 12b-1 fees, and/or higher fund expenses that take a big bite out of your investment return. There are plenty of excellent mutual funds to choose from that don’t have these burdensome costs.

Emerging markets: This component of international investing is currently a big favorite of investors. As usual, financial media hype and high returns have prompted investors to pour money into this sector. If you’re tempted to join the crowd, I remind you that these markets carry political, economic, currency, regulatory, legal and governance risks that are significant. Right now, I think the big gains in foreign markets makes timing an issue. This week, the Wall Street Journal reported that investment banking firm, Morgan Stanley, who’s a major international player, recommends that “global investors reduce their holdings in the red-hot Japanese and emerging markets, and put that money into U.S. stocks.”

From my professional experience, I’ve found that while foreign investment flows into foreign markets are a positive financial indicator, of equal or greater importance is the behavior of local investors. In this regard, it’s interesting that in the same edition of the Wall Street Journal, which carried the Morgan Stanley story, it was reported that corporate investors from emerging markets “are snapping up targets in Europe and the U.S.”

In 2005, approximately $9 billion and $14 billion from emerging markets went into investments in Europe and the United States, respectively. Something to think about.

The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent Registered Investment Adviser. Loth can be reached at mentor@centurytel.net or 328-5591.

Vail, Colorado

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